January 12, 2006

That is my prediction. For some history, read my previous blog posting about how Google increased the monetization of their SERP in Q3 by:

(1) adding up to 3-north-listings (above algo results),

(2) increasing north coverage significantly, and

(3) Variable-Term-Pricing (setting min max-bids on a per-term basis, rather than a flat $0.05 min).

These changes led Google to a very strong Q3 where they showed a sequential growth of 14% over Q2 of 2005, a very strong increase for a typically slow summer quarter. That, however, sets the standard very high for Q4 of 2005, hence my prediction that they will miss the wallstreet estimates for Q4 sequential growth. I monitored their UI closely in Q4 and did not see any significant monetization changes to boost Q4 ala what happened with Q3.

In fact, Google admitted that fact in an Nov 2005 SEC filing which stated: “seasonal trends in the third quarters of 2005 and 2004 may have been disguised by certain monetization improvements to our advertising programs,”

That said, there is many other reasons to sell GOOG, for example:

1. YPN will be hitting the Adsense program hard in 2006 once it’s out of beta. The adsense program is indeed starting to slow already, the google network revenue grew by 7% sequentially in Q3-2005 as opposed to 20% for google site.

3. Google is also hiring like nuts, 800+ people in Q3, on top of 700+ people in Q2 (i.e. a 1/3 of Google’s work force joined in these two quarter). There is two downsides to this: (a) they are hiring lower quality folks (we interview same folks and see who they pick), (ii) they are hiring like yahoo was in 1999/2000, i.e. hiring today expecting that more revenue will come later, that is not always true (as yahoo learned the hard way and laid off a ton of folks in period 2001-2003).

4. Google has been growing the cost of revenues much faster than revenue, in fact their operating margin fell from 35.2% in Q1 of 2005 to 33.5% in Q3

In summary, if you have been thinking about selling/shorting google, now might be a very opportune time. I will symbolically short 1 share of Google tomorrow 😉

— amr

update: A colleague of mine reminded me that Google did a SERP UI change in early December, they increased the font-size for the East adword listings (i.e. listings on the right rail of the page). We call this type of change an “accelerator change” which is usually done to try and catch up with revenue projections, its another signal that Google’s Q4 quarter is a bit in trouble. Note that they launched this change after the peek of xmas shopping.

update: As promossied I did short Google on the morning of Jan 13, 2005. I actually shorted 10 shares at $465.